Non-competition agreements are tough to enforce in California.

Let’s take a quick look at a major case that deals with non-competition agreements in the employment area.

CPA Ray Edwards (Edwards), a tax manager, was hired by a Los Angeles accounting firm – Arthur Andersen LLP (Andersen) in 1997. Edwards had to sign a noncompetition agreement that prohibited him from working for or seeking Anderson clients for limited periods upon his termination.

The agreement Edwards signed stated: If you leave the Firm, for eighteen months after release or resignation, you agree not to perform the professional services you provided clients you worked with during the eighteen months prior to release or resignation. This does not prohibit you from accepting employment with a client.

For twelve months after you leave the Firm, you agree not to solicit any client of the office(s) to which you were assigned during the eighteen months preceding release or resignation.

Edwards worked for Andersen for six years and was promoted to senior manager with an eye to becoming a partner. The United States government indicted Andersen in connection with Enron Corporation.

In May 2002 Andersen internally announced that HSBC USA, Inc. would purchase a portion of Andersen’s tax practice, including Edwards’s group. HSBC offered Edwards a job. Before hiring, all Andersen employees were required to execute a “Termination of Non-Compete Agreement” (TONC)
The TONC required employees to (among other things): release Andersen from “any and all” claims, including “claims that in any way arise from or out of, are based upon or relate to Employee’s employment by, association with or compensation from” defendant and continue indefinitely to preserve confidential information and trade secrets except as otherwise required by a court or governmental agency, etc.

In exchange, Andersen agreed to accept Edwards’s resignation, agreed to Edwards’s employment by HSBC, and released Edwards from the 1997 noncompetition agreement.

HSBC demanded Andersen provide a completed TONC signed by every employee before the deal went through. Andersen would not release Edwards, or any other employee, from the noncompetition agreement unless they signed the TONC.

Edwards signed the HSBC offer letter, but he did not sign the TONC. Andersen terminated Edwards’s employment and withheld severance benefits. HSBC withdrew its job offer. Edwards refused to sign the TONC because he didn’t want to give up his right to indemnification. He felt some of Andersen’s clients may sue them and name him as a defendant.

When all was said and done the California Supreme court decided that Andersen’s noncompetition agreement was invalid because the agreement restricted Edwards from working for Andersen’s Los Angeles clients after his separation from Anderson, and therefore restricted his ability to practice accounting – his profession. This violated express California law.
Said the court: An employer “cannot lawfully make the signing of an employment agreement, which contains an unenforceable covenant not to compete, a condition of continued employment. [A]n employer’s termination of an employee who refuses to sign such an agreement constitutes a wrongful termination in violation of public policy.”

Put another way, the agreement Andersen made Edwards sign in 1997 was invalid because it didn’t allow him to practice his profession for a period of time once he left his employment with Andersen. The court added that under the circumstances of this case, what was illegal was restraints that precluded one from engaging in a lawful profession, trade or business. Indeed, California courts are clear in their expression that section 16600 of the Business & Professional Code demonstrates a strong public policy of the state which “should not be diluted by judicial fiat.”

In reference to Edwards not signing the TONC because he didn’t wish to waive his right to indemnity, the bottom line was that the Labor Code says that right can’t be waived.

To say that this case was a landmark decision would be a major understatement, and even today it is still being discussed for the ramifications it has on non-competition agreements in a whole host of contexts beyond just employer-employee relationships. The court seemed to make clear that section 16600 expresses a legislative decision to invalidate non-competition agreements to be entered into by a seller of a business so long as its limiting scope is reasonable.

If you find yourself facing a situation where you are required to sign or want to get someone to sign a non-competition agreement, speak to a knowledgeable business attorney first before you sign or ask for anything. The Court in Edwards seemed to suggest that asking for a non-competition agreement beyond what you are entitled to do may expose you to liability. So don’t take a chance or you may wind up not being able to compete after the person from whom you wrongfully extracted that non-compete gets a big judgment against you. At least that’s what this lawyer thinks.

Roni Balint writes for the Law Office of Alan M. Insul. The content contained within this feature is not intended as legal advice and does not constitute an attorney-client relationship. To learn more, contact Los Angeles business attorney and California corporate lawyer, Alan M. Insul by visiting Insullaw.com.

Non disclosure agreements are essential to keep the lid on confidential information you don’t want shared with others.

Non-disclosure agreements (NDAs) ideally are the most potent when the parties who are contemplating a potential business relationship agree in advance to keep each other’s confidential information confidential. Not doing this right up front may end up with the other party telling others your secrets, using them for their own economic benefit, and exposing valuable intellectual property rights for use by anyone.

John, the innovative entrepreneur noted for his unique approach to doing business in a way that made him a roaring success, decided to partner on his newest venture with an employee he thought had the moxy to become successful. John was almost paranoid about locking sensitive files in the safe every night and taking the time to encrypt all his e-files. He didn’t give much thought to the information he shared daily with his protégé.

John didn’t mention a NDA when he first proposed his business idea to his employee, Tyler. In fact, he didn’t really think he’d need one. After all, they chatted daily and he felt Tyler was an upstanding young man.
John’s business idea of launching an online MLM that taught people how to get out of debt and make money at the same time had real potential in today’s dire economy. Tyler appeared to share his enthusiasm about the launch and how to set up the business.

John was understandably shocked when he discovered a few months later that there was a new site on the Internet that offered to teach people the tools to get out of debt and then recruited them into the business of selling the ‘get out of debt information’ to others. He called his business attorney, Arnold, to find out what he could do about this distressing state of affairs when he found out Tyler was behind the new website.

Arnold regretfully informed John that it was typically recommended that a NDA be entered prior to doing any negotiations, interviews or anything else that related to a proposed new venture where confidential information or material is shared. The fact that the cat was out of the bag was unfortunate, but there was not much anyone could do about that in the absence of a NDA.
Typically, a non-disclosure agreement clearly spells out conditions between party A and B, specifically dealing with sharing and using confidential information and materials. It usually makes reference to the parties keeping highly sensitive information confidential, details solutions for violating the agreement, and suggests arbitration for disputes over violations if necessary.

Sadly, in John’s case the NDA would have been essential to keep his brainchild MLM idea protected and it should have been put into place prior to any discussions taking place or material changing hands.
There are many examples in which a NDA is considered a critical tool. One instance involves software or other network solutions or the sharing of intellectual property (such as John’s online MLM idea.) In many instances the NDA is specific to the business being contemplated – tailored to cover each different case. So borrowing someone’s NDA won’t cut it, as it might not be enforceable later.

Generally speaking the vast majority of NDAs contain information about who the parties are, various clauses that may need to be incorporated, and most importantly, what information should be kept confidential. If either party violates the agreement, legal action can be taken. Having said that though, the whole idea of having a NDA in the first place, is to avoid litigation.

If you’re about to set up business with another person, call a business attorney and discuss the value of drafting a non-disclosure agreement. It will save you a lot of grief later. As for John, he had to kibosh his idea and move on to opening a business towing wrecks rather than make money online, while his former employee became rather wealthy from John’s original idea. If John had taken precautions up front to get a NDA in place, these roles might have been reversed….at least that is what this lawyer thinks.

Roni Balint writes for the Law Office of Alan M. Insul. The content contained within this feature is not intended as legal advice and does not constitute an attorney-client relationship. To learn more, contact Los Angeles business attorney and California corporate lawyer, Alan M. Insul by visiting Insullaw.com.

Before going into business with a partner, make sure a lawyer drafts up a buy-sell agreement that covers what will happen in the event of death, disability, “disillusionment” and the transfer of the interest in the business at retirement.

Just because you go into partnership with another person, with all of the best intentions in the world, doesn’t mean that at some point in time you may not have a falling out over – well, over any one of a number of things that happen when trying to run a company and stay friends and partners. No matter whether the form is a partnership, limited liability company or corporation, making sure the principals have properly prepared buy-sell arrangements is critical.

Think that will never happen? Think again. It’s a far too common occurrence and many people have made the mistake of not dealing with this eventuality in a buy-sell agreement, and have lived to regret that decision. The essential parts of this type of contract must be outlined in detail by your corporate lawyer and include an evaluation method for the business and how to pay out in the event of the big four – death, disability, disillusionment and transfer of the interest in the business on retirement.

If you’re having trouble imagining what kinds of situations would make you have a dust up with your business partner, speak to your lawyer. Most corporate lawyers have seen it all and been there and done that. That’s what they’re paid for, to craft a buy-sell agreement that will withstand any of the above-mentioned eventualities.

The importance of having a buy-sell agreement in place cannot be underestimated. It is a crucial document that will ultimately ensure the continuation of your business and allow your family a return on a lifetime of your hard work. Caution: this will only happen if there is money behind this agreement. No cash can end up in a major disaster, as the agreement may obligate more than the signing parties. It may obligate family, heirs and partners. Without cash, no one will be able to carry on the empire or have any security.

These issues need to be discussed in great detail prior to signing anything and they need to be resolved to the satisfaction of both partners. If something does happen and one party wants to pack it in because they fell out of “love” with their partner, they need to be covered for this possibility.

Of course, before getting that far into drafting an agreement, the crucial question of where will the money come from to fund it needs to be asked, along with how much will you need and whether or not, realistically, you are able to afford it. Remember, that without money in the background, a buy-sell agreement is potentially worthless. A worthless contract without money backing may have serious consequences; just ask your lawyer to fill you in.

In the meantime, while you are waiting to have that buy-sell agreement drafted, make a list of important questions to ask your lawyer such as “How much money in before tax dollars do we need?” “Where does the money come from?” “How much money in total is required to live up to the terms of the agreement?” Make the list a substantial one, because these kinds of agreements need to be discussed in great detail. Your lawyer knows this and will walk you through the sticky parts.

Roni Balint writes for the Law Office of Alan M. Insul. The content contained within this feature is not intended as legal advice and does not constitute an attorney-client relationship. To learn more, contact Los Angeles business attorney and California corporate lawyer, Alan M. Insul by visiting Insullaw.com.

Choosing and forming a business entity is not an easy matter, and when more up-to-date information is published in this area, it’s an invaluable guideline for business lawyers.

“Within a few weeks, the 2009 edition of Selecting and Forming Business Entities will be available,” said Alan Insul, Los Angeles business attorney and respected author of Chapter’s 3 and 7 in this year’s edition. The two looseleaf volumes along with a forms CD are specifically designed for California business lawyers working with their clients to assist them in choosing the “best” entity for their business.

The material covers the basics and more of how to go about choosing the entity, how and where it needs to be organized and also how to manage it once it is set up. The companion CD is especially crucial, as it contains annotated operating agreements that attorneys are able to use.

“This is not a lightweight publication by any means and covers evaluating entity choices, general partnerships, limited partnerships, limited liability partnerships, S&C corporations, close corporations, professional corporations and limited liability companies,” outlined Insul.

Insul’s contributions this year, Chapter 3 and Chapter 7 cover, limited liability partnerships and selecting a business names. Insul’s experience as a business attorney precedes him and he is highly regarded in Los Angeles as someone who is able to get to the heart of any legal matter, paring it down to the bare bones to deal with it. Many of Insul’s clients appreciate his ability to take a complex legal subject and sum it up in a nutshell.
“Being the CEO of a major corporation doesn’t mean they don’t appreciate the clarity of succinct advice on legal matters that affect their bottom line. This is why I strive for language that makes sense and good common sense when dealing with my areas of expertise,” explained Insul.

In a world gone complex with the intricacies of today’s business transactions, having a complete set of well written, informative and easy to understand how-to instructions makes eminent sense. “Business law isn’t getting any easier to understand, and when something like this is available for attorneys who practice in this area, it’s usually in high demand,” added Insul.

Roni Balint writes for the Law Office of Alan M. Insul. The content contained within this feature is not intended as legal advice and does not constitute an attorney-client relationship. To learn more, contact Los Angeles business attorney and California corporate lawyer, Alan M. Insul by visiting Insullaw.com.

2009 promises to be a year of reaching out to smaller business law firms and solo practitioners for Los Angeles business attorney Alan Insul in his new position for the Business Law News.

Being creative and thinking beyond the usual parameters has stood Los Angeles attorney Alan Insul in good stead for over 30 years. His personal and incisive touch when it comes to business and real estate law has gained him the reputation as the “go to” guy in the City of Angels.

Insul is noted for his deft handling of various transactional matters or adversarial proceeding in litigation. Insul is a tough and business savvy corporate management expert that takes the time to see all sides of an issue prior to proceeding.

This same tough and yet laid back approach is something that permeates Insul’s personal style when handling his clients affairs as well. He’s known to have a flair for taking some really nasty legal concepts and being able to explain them in plain English. A rare gift for an attorney, and one that will come in very handy for Insul’s newest appointment to Chairperson and Managing Editor of the Business Law News.
“We’re pleased to be making a concerted effort to reach out to and be more accessible to smaller law firms and solo practitioners. After all, the information we have is useful to everyone, no matter what the size of their firm,” outlined Insul.

The Business Law News (BLN) is the official news periodical of the California State Bar’s Business Law section – the largest section of the State bar. This periodical publishes articles that deal with, among other things, ex parte communications in a transactional law practice, the unfair competition law and how it is evolving, what commercial landlords need to understand about bankruptcy and intellectual property issues that need to be taken into consideration when doing due diligence for a merger or acquisition.

While the various topics that business lawyers handle may be as exciting as watching paint dry for the average reader, those in business who rely on attorneys with this kind of skill have a vested interest in their attorney being intimately familiar with various concepts that affect businesses of all sizes. No issue is too small when its eventual applicability may affect a major corporation sometime later.

This is something that Alan Insul is quite conversant with and as an attorney who makes the law look and sound easy, his appointment to Chairperson and Managing Editor of the Business Law News will continue to improve on the long tradition of excellence of delivering the latest developments and insights in business law to California business attorneys.

“I try to meld the advice I give as a lawyer with the actual situations that clients face, simply because giving legal advice in a vacuum just doesn’t cut it in today’s legal arena. Clients are looking for advice that is clear cut, straight forward and to the point in order to make decisions,” said Insul.

The Business Law News is responsible for publishing four quarterly periodicals featuring content written by experts in various areas of business law. The BLN also produces an annual review which is a retrospective of major developments in the area of business law during the previous year.

Roni Balint writes for the Law Office of Alan M. Insul. The content contained within this feature is not intended as legal advice and does not constitute an attorney-client relationship. To learn more, contact Los Angeles business attorney and California corporate lawyer, Alan M. Insul by visiting Insullaw.com.

Foreclosing on a mixed collateral loan is not as tough as one might think, not with the law on your side.

So in late in 1996, “The Bank of Real Estate” made you a real estate loan to go buy that 100 unit apartment complex. You thought you would spend the rest of your days soaking up the sun and drinking Kona coffee on your very own beach in Maui.

Fast forward. It is 2009, you’re a running 10% higher vacancy, the loan has reset (higher of course), and you, and your dream, are in serious trouble. Try as you might, the lender is not willing to recast your loan.

The next thing you know, the lender has gone ahead and notified you that it intends to sell all the furniture in your furnished units in one commercially reasonable sale. But they do not foreclose on the apartment complex.

You think back quickly to your college days and business law class and realize that perhaps “The Bank of Real Estate” made a major mistake. You recall something about a secured real property lender having but one action within which to foreclose against real estate security or risk losing its lien on the property. You decide to call your real estate lawyer confident in two things, the lender lost its lien on your 100 units and you have been saved from a life of burnt day old coffee and crowded beaches.

In your call, you find out that they don’t call your lender “The Bank of Real Estate” for nothing. Counsel explains that your lender took a secured interest in both the real estate and personal property used with the real estate – i.e. the furniture used in your furnished units. This is the so-called “mixed collateral” situation and lenders face it all the time.

Empathetically, your lawyer explains that when it comes to dealing with mixed collateral loans, sometimes there is confusion about how a lender is to proceed in the event of a borrower’s default. First off, the term “mixed collateral” refers to those situations where the loan is secured by some combination of real and personal property. For example, a trust deed against the building together with a security interest in accounts receivables, fixtures, furniture and equipment.

The confusion stems from the general differences in the way a lender forecloses on a loan secured by real property versus personal property. California, like most jurisdictions, provides a set of rules to reconcile the differences in requirements for foreclosing personal versus real property.
In your case, when you defaulted, “The Bank of Real Estate” had the right to pick and choose which property (real versus personal property) to foreclosure and in which order.

California’s Commercial Code §9401 provides the primary rules for dealing with these mixed collateral situations. It, and the cases interpreting it, hold that the lender gets to pick the order in which the collateral is foreclosed and may sell its security in a series of sales without violating the one action rule that you remembered from your business law class. So, for example, “The Bank of Real Estate” could choose to foreclose against the furniture, as it did, and then the real property ….. or the other way around. That’s the easy part.

As for our friend and his fleeting dreams of Kona coffee on Maui, he should have considered contacting his trusty real estate lawyer before he took the adjustable loan and perhaps he’d be riding the waves to no where instead of the Amtrack to his new no where job….. at least that’s what this lawyer thinks.

This is an unlikely scenario but designed to make an illustrative point.
2 Nothing in this article is intended to nor should it be construed as legal advice. Situations involving mixed collateral can be quite complex and you should consult with your legal professional regarding your particular situation.

Roni Balint writes for the Law Office of Alan M. Insul. The content contained within this feature is not intended as legal advice and does not constitute an attorney-client relationship. To learn more, contact Los Angeles business attorney and California corporate lawyer, Alan M. Insul by visiting Insullaw.com.